Home buyers often ask what a house they are looking at is assessed for. While this can be valuable information it should not be used to judge the market value of a property. An appraisal is a very thorough, detailed analysis of a property’s market value while the value assessed for tax purposes is merely that, a value analysis for real estate tax purposes.
A real estate appraiser does a very thorough job of inspecting a property to determine its age, size, conditions and features. This involves a detailed inspection of the property both inside and out. The appraiser then compares the subject property to recent sales in the area to estimate its fair market value. Fair market value is loosely defined as the highest price a property will bring when offered on the open market where both the seller and buyer are typically motivated, knowledgeable and both acting in his or her own best interest. Fair market value must be based on comparison with actual sales which are arms length transitions where there is no relationship with the buyer and seller. Sales between family members, short sales and sales where the seller is under some duress to sell the property are not arms length transactions and should not be used to estimate fair market value.
Where an appraiser is doing an estimate of fair market value adjustments are made to account for differences between the subject property and the most recent arms length sales of comparable properties. An assessor has a somewhat different process. Often times, the assessor does not do an inspection of the interior of a property. He simply inspects the outside and gets information about the property such as age, size, number of bedrooms, etc. from the data already on file in the tax assessor’s office. He does an analysis of all of the recent sales in the area but instead of making a direct comparison of these sales to the subject he often calculates an average selling price per square foot of all properties and applies this number to each property being assessed. The pitfall here is that the assessor generally does not have actual knowledge of the materials, features, quality and condition of the properties being assessed. The average price per square foot is applied to all properties whether they have high-end custom features or lesser quality builder-grade materials and features.
When making a decision whether or not to buy a particular property a buyer must be aware of the quality and condition of the property and not make his decision based on an average of the selling price within the area. Realtors use a process in pricing properties that is similar to the detailed analysis that an appraiser uses and the assessed value is rarely a good indication of the real market value. When looking at a property ask the Realtor to give you information about recent sales and draw your own conclusion as to the properties’ value. Don’t rely on an assessment which may be much higher, or lower, than the actual fair market value of the property.